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Insurance Regulation: International Horizons 26 October 2012 © Lloyd’s 2012

Sean mcgovern lloyd’s

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© Lloyd’s 2012

Risks facing the global insurance industry Insurance Banana Skins 2011 1.

Regulation (5)

2.

Capital (3)

3.

Macro-economic trends (4)

4.

Investment Performance (1)

5.

Natural Catastrophe (22)

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PWC, 2011

© Lloyd’s 2012

What is the biggest risk to your business? ► A.

Investment performance

► B.

Regulation

► C.

Natural Catastrophes

► D.

Capital

► E.

Macro-economic trends

41%

24%

10%

A

B

12%

12%

C

D © Lloyd’s 2012

E

In the last five years, has the amount of time your board spends on regulatory issues: ► A.

Stayed the same

► B.

Grown by up to 30%

► C.

Grown by over 30%

► D.

Reduced

65%

30%

4% A

B

0% D

C © Lloyd’s 2012

At a Dinner Party, which profession would you avoid admitting to? ► A.

A banker

► B.

An insurer

► C.

An insurance broker

► D.

A regulator

► E.

A politician

40%

38%

12% 6%

4% A

B

C

D © Lloyd’s 2012

E

© Lloyd’s 2012

© Lloyd’s 2012

© Lloyd’s 2012

“Insurance is about protection, not speculation”

The Prime Minister, David Cameron

© Lloyd’s 2012

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“but there are many other parts of our financial system, of the City, which played no role in the origins of the financial crisis, and which have continued to provide important high quality services to the world economy throughout the last five years (equity research and distribution, asset management services) the wholesale insurance market of Lloyds and related companies, commodities trading – and it is essential that as we fix the problems of the banking system, we also celebrate the success of many other City services”

Lord Turner, Chairman of the FSA

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“the insurers are on a roll…the Lloyd's of London insurance market has recovered well from a difficult 2011”

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James Ashton, Business Editor The Independent

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Europe: a new era?

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Chair: alastair evans

© Lloyd’s 2012

What was the original implementation date of Solvency II? ► A. 30 June 2012 ► B. 1 November 2012

42%

► C. 1 January 2013 33%

► D. 1 January 2014

► E. 1 January 2015 23%

2% A

B

C

0% E

D © Lloyd’s 2012

When do you think Solvency II enter into force? ► A.

2015

► B.

2016

► C.

Later

► D.

Never

37% 33%

21%

10%

A

B

C

D

© Lloyd’s 2012

Julian adams fsa

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© Lloyd’s 2012

Solvency II will deliver longer term benefits to my business ► A.

Strongly Agree

► B.

Agree

► C.

Disagree

► D.

Strongly Disagree

71%

18% 6%

4% A

B

C

D © Lloyd’s 2012

Olav Jones Insurance Europe

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© Lloyd’s 2012

Insurance trends and regulation in Europe London, 26 October 2012

Olav Jones Deputy Director General Director, Economics & Finance Department Insurance Europe

Agenda Trends and regulation in Europe

1

Insurance Europe and the European insurance industry

2

Regulatory trends and impact on the industry

3

Stability and supervision

4

Prudential regulation

5

Accounting

6

Gender neutral Pricing

7

Pensions

21

Insurance Europe

Who?

European insurance and reinsurance federation, founded in 1953

What?

Represents around 95% of European insurance market by premium income Covers life, non-Life, (re)insurers, mutuals

Why?

Enhancing the industry’s reputation, protecting and optimising insurers’ business environment, safeguarding insurability, championing best practice

22

Members 34 national associations 26 EU member states 6 non-EU markets

Croatia, Switzerland, Iceland, Norway, Turkey, Liechtenstein

2 associate members Serbia, San Marino

3 partners Russia, Ukraine, Kosovo

23

Insurance contribution to the economy Insurance Europe represents more than 5 000 European (re)insurers, which:

generate premium income of almost €1 100bn

employ nearly one million people

invest around €7 700bn in the economy

24

Key stakeholders in the EU legislative process

G-20

IAIS

Council of the EU

IASB OECD

European Parliament FSB

European Commission ESAs ESRB

GFIA National associations

Business Europe PEIF

RAB

CFO Forum

AMICE

CRO Forum

Insurers

EBF

EFAMA BEUC

25

Ambitious regulatory programme Omnibus II Solvency II

Pensions IORP review

IAIS ComFrame

Anti-discrimination

Stability issues Financial ADR Data protection SIFIs conglomerates Collective redress

Accounting

EMIR

FTT Savings tax FATCA

PRIPs IMD MiFID

Anti-money laundering

Credit rating agencies

Climate change Natural catastrophes

ELD Offshore oil safety

26

Regulatory trends Global scope Crisis triggered regulatory activities at global and EU level Political momentum from G20 EU/international initiatives develop in parallel, but shared objectives Ambitious scope, pace and objectives Broad scope Quick regulatory pace Increasingly complex regulation Mostly banks in regulatory/supervisory focus But cross-reading to insurance Overly conservative – especially since crisis

27

How trends affect insurance (Un)level regulatory playing field

From bank-type regulations to insurance risks of read-across at both EU and international level risks of inappropriate design Little knowledge of insurance business model and little consideration of insurance features Intensified work on prudential regulation Tendency towards higher level of prudence Failure to properly recognise that nature of insurance business might have unintended consequences

28

Stability and macroprudential supervision What is expected? Broad scope – identification of globally systemically important insurers (G-SIIs) G-SIIs mostly European? Regulatory approach only marginally different from banking Large EU insurance companies face a clear risk of being pulled into scope of systemic risk regulation

What are the challenges? Risk of additional capital requirements beyond risk profile Increased levels of supervision Resolution and recovery planning Moving beyond the message “insurance differs from banking” towards “the value of insurance for the economy” and unintended consequences

29

Prudential regulation What is expected? Supervisory tendencies towards high(er) levels of prudence beyond what is economically justified Delays in timing of Solvency II Open Solvency II issues: Directive Level Issues: Long-term guarantees package, Equivalence Implementation Level Issues Range of issues on calculation methods and calibrations including CAT risk, Securitisations, Currency

What are the challenges? Ensuring regulation correctly recognises the long term nature of insurance and has appropriate calibrations Badly designed regulation could have potentially adverse impact for insurers, consumers and the economy Well designed and calibrated regulation provides better protection against future crises If not, risk of higher costs for customers, fewer products and less stability and growth in Europe Ensuring regulatory processes are manageable (ie avoid death by documentation)

30

Why the delays with Solvency II? The crisis showed that SII would overstate credit risk for longterm products, creating artificial and unmanagable volatility During times of market distress, when credit spreads jump, asset values and therefore solvency reduce dramatically even where the insurance company cares only about actual defaults.

Accounting: IFRS 4 What is expected?

What are the challenges?

Accounting rules that allow balance sheet and P&L reporting which reflects the real economics and performance of the business

Ensure the final standard reflects the nature of insurers’ long-term business and avoids confusing volatility

Timeline

Avoiding further delay (IFRS 4 Phase I is a half measure)

 IFRS available 2014/2015  Mandatory effective date 2017/2018  Non-convergence with FASB?

Limited re-exposure draft H1 2013 Presentation requirements uncertain

Interaction with IFRS 9  Mandatory effective date 2015

 Lack of comparability, black box perception, volatility due to rules  Insurers’ cost of capital remains high

IFRS 4 and 9 mandatory effective dates not aligned: uncertainty of full requirements Consistency where appropriate between IFRS and Solvency II 32

Differentiation, not discrimination What is expected?

What are the challenges?

21 Dec 2012: ECJ Test-Achats ruling deadline on gender-neutral pricing

Operators to ensure compliance with ECJ ruling in light of EC guidelines

2014: EC Report on gender

Economic impact of the ban on gender (Oxera report, Dec 2011)

EU draft Anti-Discrimination Directive (age and disability) stalled in Council

Legal certainty on use of age/disability an absolute priority

33

Pensions What is expected? Follow up to White Paper Several initiatives to achieve sustainable pensions: Role of complementary retirement savings Resume work on Portability Directive Develop code of good practice EP report on White Paper: first draft Nov 2012 Review of IORP Directive QIS exercise: mid-Oct to Dec QIS results: spring 2013 Proposal: summer 2013?

What are the challenges? Political and highly technical/complex discussions Realistic timetable Ensure consistent prudential frameworks take account of pension funds’ specific features Different understanding of “pensions” in different member states can lead to misinterpretations

34

Questions?

For more information: www.insuranceeurope.eu

Europe: a new era?

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Q&A

© Lloyd’s 2012

How many languages have the status of “Official EU languages” ? ► A.

1

► B.

5

► C.

15

► D.

23

► E.

27

29%

18%

18%

18%

C

D

E

16%

A

B

© Lloyd’s 2012

Coffee Break

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© Lloyd’s 2012

International: meeting the global challenges

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Chair: sean mcgovern © Lloyd’s 2012

Philippe brahin swiss re

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© Lloyd’s 2012

Insurance regulation – Current international issues Philippe Brahin, Swiss Re, Governmental Affairs & Sustainability Lloyd's Conference, 26 October 2012

Table of contents  Financial crisis triggered a wave of rules and regulations  Reforms are being introduced at a challenging time  New regulatory architecture represents both risks and opportunities  Conclusion

Insurance Regulation Conference I 26 October 2012

42

Financial crisis triggered a wave of rules and regulations

Insurance Regulation Conference I 26 October 2012

43

Regulatory reforms introduced in 2008/2009 aimed to address the roots of the financial crisis Causes of 2008 financial crisis Mortgage Lending and housing bubble G20

Global imbalances Financial innovation and complexity

Accounting Deregulation and fragmented regulation Off-balance sheet finance Failure of risk management systems

FSB IMF

BCBS IAIS IOSCO

Excessive leverage

Lack of macro-prudential view Short-term incentives

Insurance Regulation Conference I 26 October 2012

National regulators

Thematic analysis

International standards

National legislation

44

Implementation challenges

Rating agencies

Expected global regulatory process

OTC Derivatives and CDS

High-level political agreement

Instead of a well-coordinated regulatory system, the industry now faces a mosaic of rules and regulations… United States NAIC solvency modernization Federal Insurance Office (FIO) Systemic risk regulation (FSOC) CDS regulation & clearing houses Financial tax initiatives Compensation regulation SEC roadmap to IFRS Rating agencies regulation

Latin America Brazil and Argentina restrictions

Europe Solvency II implementing measures New supervisory architecture (ESAs, ESRB) CRD IV for banks Banking Union Financial transaction taxes Insurance guarantee schemes Crisis management and resolution Rating agencies regulation Revisiting securitisation Hedge Funds regulation

International Financial Stability Board (FSB) agenda BCBS and Basel III IAIS on group supervision (ComFrame) G-SIFI policy measures IMF tax levies IASB & FASB project Insurance Regulation Conference I 26 October 2012

Asia Pacific Solvency reforms Investment rules Market access

45

… …resulting in increasingly complex requirements and market distortions … Regulatory developments

Examples

 Increased conservative solvency approaches

– Solvency II pillar I issues

 New macro-supervisory regimes

– ESRB (EU), FSOC (US) and FSB (global)

 Spill-over of banking considerations

– Systemic risk measures, IMF levies

 Dominant role of central banks

– Composition of ESRB/FSOC

 Protectionist and fragmented regimes

– US reins. affiliated tax, ring-fencing

 Market distortions and competition issues

– Bail-in mechanisms and taxes

 Supervisors and governments under political pressure to implement changes without full assessment and appreciation of economic impact

Insurance Regulation Conference I 26 October 2012

46

…with various – and mostly adverse – implications for global reinsurers Adverse regulatory implications

Examples

 Increased capital requirements

– Solvency II, US RBC

 Limits on activities and concerns over complexity

– G-SIFI policy measures

 Increased reporting requirements and overall costs

– Solvency II pillar III and ECB

 Reputational risks in complying with changes

– EU and US Capital market reforms

 Forced restructuring and asset allocation

– Dodd-Frank, Solvency II

 Extraterritoriality and discrimination

– US affiliated tax, Brazil restrictions

Positive regulatory effects

Examples

 Increased demand for capital relief solutions

– Solvency II / Asia RBC

 Reduction of collateral requirements

– State initiatives, US surplus lines

 Harmonisation of supervision

– EU-US dialogue, IAIS ComFrame

 Global re/insurers need to remain active in addressing these regulatory developments

Insurance Regulation Conference I 26 October 2012

47

Regulatory reforms are being introduced at a challenging time

Insurance Regulation Conference I 26 October 2012

48

2011/2013 marks a new phase for regulatory reforms within the insurance and financial services industry 

2008 – 2010 phase)

Multiple proposals put forward

(1st

US Treasury White Paper, EU architecture, FSB proposals …



2011 – 2013

Measures become more concrete

(2nd phase)

FSOC rules, Solvency II, US ORSA, OTC Derivatives…



2014 & beyond Years of implementation and compliance Speed and number of reforms is alarming

The insurance sector has limited time to engage and assess the impact of these reforms… Many regulators and policymakers are also overwhelmed… The regulatory clock is ticking... Insurance Regulation Conference I 26 October 2012

49

(3rd phase)

Reforms are taking place in a challenging and uncertain macro-economic environment 

Eurozone crisis



US fiscal cliff and debt ceiling



Banking and financial system fragility



Weak economic growth and high unemployment



High interconnectivity of the global economy Global commitment to reforms

"Global growth has decelerated and substantial uncertainties and downside risks remain... Advanced economies should deliver the necessary structural reforms and implement credible fiscal plans … " IM Financial Committee, Tokyo, 13 October 2012

Insurance Regulation Conference I 26 October 2012

50

Limited work has been conducted to assess the cumulative impact of these reforms      

On-going reforms Solvency II NAIC SMI Basel III Dodd-Frank Act Capital Market Reforms SIFI measures

     

Expected impact Capital requirements Regulatory costs Asset allocation Product offering Market dislocations Competition/consolidation



Sector-specific impact studies have been conducted or are underway, but no cumulative impact study has been conducted



Last-minute changes driven by the crisis are not fully assessed



Cross-sectoral implications have been neglected and only recently considered or discussed

Insurance Regulation Conference I 26 October 2012

51

We need to protect the business fundamentals of insurance while reforms are introduced Business fundamentals to protect  Risk pooling 

Capital fungibility



Global claims handling



Long-term investments



Risk-based tariffs



Level playing field

Political and regulatory risk drivers  Protectionism 

Discrimination



Non-risk based measures



Excessively conservative measures



Wrong regulatory incentives

Insurance Regulation Conference I 26 October 2012

Industry's claims Re/insurers are shock absorbers and long-term investors Insurance activities are vital for economic growth and development Re/insurers are continuously expanding their offering to address the challenges of the 21st century Regulation needs to take into account insurance sector specificity and reflect the economic reality of insurance groups 52

New supervisory architecture represents both risks and opportunities Insurance Regulation Conference I 26 October 2012

53

Macro-prudential surveillance

Financial Stability Board (FSB)/IMF IAIS

BCBS

IOSCO

Others

Systemic risk boards/councils (ESRB/FSOC)

Micro-prudential supervision

Financial conglomerate supervision ComFrame for international insurance groups Financial sector supervision

Insurance group supervision

Insurance solo supervision

Insurance solo supervision

Source: Swiss Re

Insurance Regulation Conference I 26 October 2012

54

Risk information

Early risk warnings

Regulators have to strike the right balance between macro-prudential surveillance and micro-prudential supervision

Macro-regulation – new institutions created, with risks of overlaps and duplication European Systemic Risk Board (ESRB) was established in 2010; under ECB chairmanship US Financial Stability Oversight Council (FSOC) was established by Dodd-Frank Act in 2010; under US Treasury chairmanship Financial Stability Board (FSB) was established in 2009 under G20 impetus to monitor the global financial system International Monetary Fund (IMF) is gaining increased importance, relevance and means to ensure financial stability International Association of Insurance Supervisors (IAIS) established the Financial Stability Committee in 2011 

Serious risk of duplication and confusion of the roles and responsibilities of these new or enhanced institutions (and also with group supervisors)



Institutions dominated by central bankers; measures and recommendations developed according to banking approaches and experiences



Challenge for the insurance industry to be heard and understood

Insurance Regulation Conference I 26 October 2012

55

Micro-regulation – Important reforms are underway, their expected benefits should not be undermined Examples

Opportunities

Challenges/concerns

Solvency II

   

Risk-based and economic approach Incentives for ERM Group perspective Equivalence

   

NAIC SMI

   

Enhanced principles-based approach Promote ERM/ORSA Reinsurance collateral reform Recognise int'l standards, practices

 Minimum harmonisation  Excessive or duplicative requirements  Limited progress

IAIS ComFrame

   

Increase regulatory convergence Achieve recognition of regimes Promote international standards Improve supervisory cooperation

   

Insurance Regulation Conference I 26 October 2012

Excessive requirements Artificial volatility Inconsistent implementation Limits of the standard model

Additional layer of supervision Duplication of requirements Unlevel playing field Last stop before SIFI surcharges

56

International standard setting bodies focused on global SIFIs designation and measures G20

FSB

BCBS

IAIS

29 G-SIBs identified in November 2011

G-SIIs expected to be designated in April 2013

IOSCO Other G-SIFIs expected; possibly CCPs, MMFs

Enhanced Supervision / Effective resolution / Higher Loss Absorption Highlights of industry comments: 

Inconsistencies between IAIS qualitative assessment and methodology



Importance to calibrate the policy measures to the sources of systemic risk



Market implications of G-SII designation unknown

SIBs: systemically important banks SIIs: systemically important insurers CCPs: centralized counter parties MMFs: money market funds

57

Insurance Regulation Conference I 26 October 2012

Conclusion

Insurance Regulation Conference I 26 October 2012

58

Summary remarks 

Instead of well-coordinated reforms, the industry is faced with a mosaic of requirements



Reforms are being introduced/modified in a challenging and uncertain economic environment



Too little attention has been given to the cumulative and cross-sectoral impact of the reforms



To preserve its risk capacity, the insurance industry needs to protect the fundamentals of its business model



Micro-prudential reforms represent opportunities, which should not be undermined, while the new macro-prudential layer introduces new challenges



The systemic risk debate remains highly political with uncertain implications



Global re/insurers to remain engaged in order to contribute to the regulatory debate and protect insurance business model

Insurance Regulation Conference I 26 October 2012

59

Thank you

Legal notice ©2012 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this presentation.

Insurance Regulation Conference I 26 October 2012

61

George brady iais

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© Lloyd’s 2012

International Insurance Regulatory Reform: “Meeting the Global Challenges”

George Brady Deputy Secretary General International Association of Insurance Supervisors Lloyd’s: Insurance Regulation Conference: International Horizons 63 26 October 2012

Outline

1. Evolution of the IAIS 2. Standard Setting 3. Standard Implementation

4. Financial Stability 5. Conclusion

64

Outline

1. Evolution of the IAIS 2.

Standard Setting

3.

Standard Implementation

4.

Financial Stability

5.

Conclusion

65

1. Evolution of IAIS: Focus & Standard Setting Strategic areas

Overall Focus

1994 – 1999 Childhood Nurturing international cooperation

2000-2010 Adolescence

2011Adulthood International cooperation with International cooperation with globally consistent standards high level Macroprudential standards approach

Updated ICPs Globally consistent standards including No ICPs, a few qualitative and supervisory High-level ICPs quantitative Standard setting principles and and standards requirements standards Focus on group wide supervision for IAIGs (ComFrame)

1. Evolution of IAIS: Implementation, Stability, External Interaction Strategic areas

1994 - 1999

Standard Regional implementation seminars

Financial and insurance market stability

External interaction

2000-2010

2011Self-assessment & Self-assessment peer review (FSAPcompatible) Regional seminars MMoU Financial inclusion Training materials Regional seminars and training materials Permanent macro Key Risk & Trends prudential surveillance (2 times/yr.) SIFIs identification and policy measures Global Reins. Global Ins. Market Market Report Report (GIMAR)

FSF/FSB (a few FSF (a few meetings/yr.) meetings/yr.) Joint Forum and others Joint Forum

FSB (more than 50 meetings/yr.) Joint Forum and others

1. Evolution of IAIS: IAIS activities today

68

Outline

1.

Evolution of the IAIS

2. Standard Setting 3.

Standard Implementation

4.

Financial Stability

5.

Conclusion

69

2. Standard Setting: Three Major Developments

1. Revised Insurance Core Principles (October 2011)

2. ComFrame •

Common Framework for the Supervision of Internationally Active Insurance Groups) (end of 2013)

3. G-SII policy measures (April 2013) •

G-SII: “Global systemically important insurer”

2. Standard Setting: Raising the Bar • Group-wide supervision • Formulate a comprehensive framework

• Operationalise it

• Convergence of regulatory requirements • Qualitative requirements (risk management, governance) • Quantitative requirements (solvency, valuation, etc.) • Supervisory practices (see “Implementation”)

2. Standard Setting: ComFrame

• Supervision of internationally active insurance groups (IAIGs) in totality • Convergence of qualitative and quantitative requirements • ICPs as foundation • Proportionality • Level playing field

• Evolutionary but demonstrable progress

Outline

1.

Evolution of the IAIS

2.

Standard Setting

3. Standard Implementation 4.

Financial Stability

5.

Conclusion

73

3. Standard Implementation

• IAIS as catalyst • Partnership with other organisations

• “Implementation” of ICPs • Self-Assessment & Peer Review • Education & Capacity Building

• MMoU and supervisory colleges • Financial inclusion • Microinsurance, Takaful • Access to Insurance Initiative (A2ii)

Outline

1. Evolution of the IAIS 2. Standard Setting 3. Standard Implementation

4. Financial Stability 5. Conclusion

75

4. Financial Stability: Background •

Financial Crisis •

•

Insurance: AIG, others

Interconnectedness • • •

•

Markets Products Financial institutions

Key lessons learned • • •

Macro perspective – “big picture” Raising the bar Supervisory Cooperation & Coordination 76

4. Financial Stability

• Systemically Important Financial Institutions (SIFI) project • Global Systemically Important Insurer (G-SII)

• Addressing regulatory gaps • Establishing macroprudential surveillance

4. Financial Stability: Systemic risk and insurance • Traditional insurance • Idiosyncratic • Long-term nature

• Non-traditional/non-insurance financial • Credit intermediation/maturity transformation • Capital market-related

4. Financial Stability: Systemic risk and insurance • IAIS Papers: “Insurance and Financial Stability” and “Reinsurance and Financial Stability”

• G-SII - Methodology: 5 indicators • • • • •

Non-traditional, non-insurance (NTNI) Interconnectedness Size Global activities Substitutability

• G-SII - Policy measures • Intensive supervision • Enhanced resolution • Other measures (higher loss absorbency, structural measures, and restrictions)

4. Financial Stability: Systemic risk and insurance G-SIIs: IAIS Process • Data collection - by October 2012 • Supervisory judgment - by early 2013 • Methodology development - by early 2013 • Policy Measures development - by April 2013 • G-SIIs designation - by early 2013

Outline

1.

Evolution of the IAIS

2.

Standard Setting

3.

Standard Implementation

4.

Financial Stability

5. Conclusion

81

5. Conclusion: Standard Setting Architecture

5. Conclusion Open Questions • Standard Setting • •

Convergence Quantitative requirements

• Standard Implementation • • •

IAIS role in monitoring, capacity building Proportionality Regulatory cooperation support (colleges, MMoU)

• Financial Stability • •

G-SIIs? Policy measures (nature; implementation)

Thank You

www.iaisweb.org [email protected] 84

International: meeting the global challenges

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Q&A © Lloyd’s 2012

Closing comments

© Lloyd’s 2012

© Lloyd’s 2012